================================================================================

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-Q


  [X]    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         For the quarterly period ended JUNE 30, 2001.

  [ ]    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         For the transition period from ____________ to ____________.


                        Commission file number _________



                           EXCHANGE APPLICATIONS, INC.
             (Exact name of registrant, as specified in its charter)


         DELAWARE                                                04-3338916
(State or other jurisdiction of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)


                89 SOUTH STREET, BOSTON, MASSACHUSETTS    02111
             (Address of principal executive offices)   (Zip Code)

        Registrant's telephone number, including area code 617-737-2244


--------------------------------------------------------------------------------
              (Former name, former address and former fiscal year,
                          if changed since last report)

Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  |X|   No
             -----     -----

State the number of shares outstanding of the registrant's common stock, as of
the latest practicable date.

         Number of Shares 34,065,991        Outstanding as of August 10, 2001
                          ----------                          ---------------

================================================================================
<PAGE>
                           EXCHANGE APPLICATIONS, INC.

               Form 10-Q for the Three Months Ended June 30, 2001


                                Table of Contents





                          PART I. FINANCIAL INFORMATION

                                                                     Page Number
Item 1.  Financial Statements (unaudited):

         Consolidated Balance Sheets as of June 30, 2001
         and December 31, 2000 (audited)                                   3

         Consolidated Statements of Operations for the
         three and six months ended June 30, 2001 and 2000                 4

         Consolidated Statements of Cash Flows for the
         six months ended June 30, 2001 and 2000                           5

         Notes to Consolidated Financial Statements                        7

Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operation                               12

Item 3.  Quantitative and Qualitative Disclosure about Market Risk        22




                           PART II. OTHER INFORMATION

Item 1.  Legal Proceedings                                                28

Item 4.  Submission of Matters to a Vote of Security Holders              28

Item 6.  Exhibits and Reports on Form 8-K                                 29


         Signatures                                                       32











                                        2
<PAGE>
                         PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                  EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE><CAPTION>
                                                                                DECEMBER      JUNE 30,
                                                                                31, 2000        2001
                                                                                --------      --------
<S>                                                                             <C>           <C>
                                     ASSETS
Current assets:
  Cash and cash equivalents ................................................    $  8,617      $  5,048
  Accounts receivable, net of allowance for doubtful accounts ..............      16,969         7,203
  Prepaid expenses and other current assets ................................       4,270         4,179
                                                                                --------      --------
         Total current assets ..............................................      29,856        16,430

Property and equipment, net ................................................      10,413        10,074
Non current assets from MicroStrategy Incorporated transaction .............      42,406        32,594
Goodwill ...................................................................      44,980        31,385
Other intangible assets ....................................................      24,753         8,025
Other assets ...............................................................       9,899         3,099
                                                                                --------      --------
         Total assets ......................................................    $162,307      $101,607
                                                                                ========      ========


  LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable .........................................................    $  5,717      $  5,295
  Accrued expenses .........................................................      15,916        13,854
  Current portion of MicroStrategy Incorporated obligation .................      16,833         5,733
  Current portion of note payable to certain former
     shareholders of Customer Analytics ....................................       2,875           415
  Line of Credit ...........................................................         --          4,012
  Note payable to Insight Capital Partners .................................       1,500         5,949
  Current portion of capital leases ........................................       1,987         2,269
  Deferred revenue .........................................................       8,636         7,692
                                                                                --------      --------
         Total current liabilities .........................................      53,464        45,219

Long term portion of capital leases ........................................       1,091           128
Long term portion of note payable to certain former
  shareholders of Customer Analytics .......................................       1,965         2,019

Redeemable Convertible Preferred Stock .....................................         --          4,784

Stockholders' equity:
  Preferred Stock; $.001 par value -
  10,000,000 shares authorized, zero and 5,325,645 shares
  outstanding at December 31, 2000 and   June 30, 2001, respectively .......         --            --

  Common Stock, $.001 par value -
  150,000,000 shares authorized; 32,970,359 and 34,062,925 shares
    issued at December 31, 2000 and June 30, 2001, respectively ............          33            34
  Additional paid-in capital ...............................................     250,656       267,964
  Accumulated deficit ......................................................    (144,502)     (218,350)
  Deferred compensation ....................................................        (204)          (62)
  Cumulative translation adjustment ........................................        (196)         (129)
  Treasury stock, at cost; 366,565 and 572,010 shares at December
    31, 2000 and June 30, 2001, respectively ...............................         --            --
                                                                                --------      --------
         Total stockholders' equity ........................................     105,787        49,457
                                                                                --------      --------
         Total liabilities and stockholders' equity ........................    $162,307      $101,607
                                                                                ========      ========
</TABLE>

                   The accompanying notes are an integral part
                   of these consolidated financial statements.

                                        3
<PAGE>
                  EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
               (IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE><CAPTION>
                                                             THREE MONTHS ENDED,                   SIX MONTHS ENDED,
                                                       ------------------------------      ------------------------------
                                                      JUNE 30, 2000     JUNE 30, 2001     JUNE 30, 2000     JUNE 30, 2001
                                                       ------------      ------------      ------------      ------------
<S>                                                    <C>               <C>               <C>               <C>
Revenues:
  Software license fees .............................  $     13,351      $      4,628      $     23,613      $     13,673
  Services and maintenance ..........................         6,287             6,179            11,187            12,894
                                                       ------------      ------------      ------------      ------------
         Total revenues .............................        19,638            10,807            34,800            26,567
Cost of revenues:
  Software license fees .............................           221               298               362               501
  Services and maintenance ..........................         4,147             4,601             7,490             9,115
                                                       ------------      ------------      ------------      ------------
         Total cost of revenues .....................         4,368             4,899             7,852             9,616

Gross profit ........................................        15,270             5,908            26,948            16,951
Operating expenses:
  Sales and marketing ...............................         6,188             9,448            11,029            19,728
  Research and development ..........................         4,576             5,155             7,788            11,376
  General and administrative ........................         2,229             5,417             4,174             9,639
Amortization of Microstrategy investment ............         5,105             4,906            10,010             9,812
Amortization of goodwill and intangible assets ......         3,506             5,189             3,506            10,319
Impairment of goodwill and intangibles assets .......          --              19,349              --              19,349
Restructuring charge ................................          --               7,460              --               7,460
                                                       ------------      ------------      ------------      ------------
         Total operating expenses ...................        21,604            56,924            36,507            87,683

Loss from operations ................................        (6,334)          (51,016)           (9,559)          (70,732)

Interest expense, net ...............................          (303)           (1,671)             (473)           (2,212)
                                                       ------------      ------------      ------------      ------------
Loss before provision for income taxes ..............        (6,637)          (52,687)          (10,032)          (72,944)

Provision for income taxes ..........................           (21)               (6)              (21)              (12)
                                                       ------------      ------------      ------------      ------------
Net loss ............................................  $     (6,658)     $    (52,693)     $    (10,053)     $    (72,956)
                                                       ============      ============      ============      ============
Accretion to redemption value of Series A
  Redeemable Convertible Preferred Stock ............          --                 477              --                 892
Net loss available to common stockholders ...........  $     (6,658)     $    (53,170)     $    (10,053)     $    (73,848)
                                                       ============      ============      ============      ============
Basic net loss per share ............................        ($0.25)           ($1.60)           ($0.39)           ($2.24)
Diluted net loss per share ..........................        ($0.25)           ($1.60)           ($0.39)           ($2.24)

Basic weighted average common shares outstanding ....    26,367,838        33,279,603        25,506,414        33,048,532
                                                       ============      ============      ============      ============
Diluted weighted average common shares outstanding ..    26,367,838        33,279,603        25,506,414        33,048,532
                                                       ============      ============      ============      ============
</TABLE>
                   The accompanying notes are an integral part
                   of these consolidated financial statements.

                                        4
<PAGE>
                  EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE><CAPTION>
                                                                                SIX MONTHS ENDED JUNE 30,
                                                                                 ----------------------
                                                                                   2000          2001
                                                                                 --------      --------
<S>                                                                              <C>           <C>
Cash flows from operating activities:
  Net loss ...................................................................   $(10,053)      (72,956)
  Adjustments to reconcile net loss to net cash used in operating activities
  Depreciation and other amortization ........................................      1,367         2,625
  Amortization of MicroStrategy asset ........................................      9,811         9,812
  Non cash interest expense related to MicroStrategy obligation ..............      1,321           567
  Non cash interest expense related to notes payable to former
     shareholders of Customer Analytics ......................................       --              54
  Non cash interest expense related to bridge notes and warrants
     issued to Insight Capital Partners ......................................       --             768
  Compensation expense associated with stock options .........................        117            57
  Amortization of goodwill and other intangible assets .......................      3,506        10,319
  Impairment of goodwill and other intangible assets .........................       --          19,349
  Non cash restructuring charges .............................................       --           6,690
  Changes in operating assets and liabilities:
     Accounts receivable .....................................................     (5,839)        9,766
     Prepaid expenses and other current assets ...............................        (35)        1,543
     Accounts payable ........................................................      1,989          (422)
     Accrued expenses ........................................................     (8,074)       (1,407)
     Deferred revenue ........................................................     (2,264)         (944)
                                                                                 --------      --------
        Net cash used in operating activities ................................     (8,154)      (14,179)
                                                                                 --------      --------

Cash flows from investing activities:
  Sales (purchases) of marketable securities .................................     10,597          --
  Purchases of property and equipment ........................................     (4,683)       (1,981)
  Increase in other assets ...................................................     (8,623)          110
                                                                                 --------      --------
        Net cash used in (provided by) investing activities ..................     (2,709)       (1,871)
                                                                                 --------      --------

Cash flows from financing activities:
  Repayments under capital leases ............................................       --            (986)
  Repayments of notes payable to former shareholders of Customer Analytics ...       --          (2,460)
  Issuance of common stock under ESPP ........................................        209           230
  Issuance of notes payable to Insight Capital Partner .......................       --           6,867
  Proceeds from sale of Series A Preferred Stock .............................       --           4,587
  Proceeds from bank line of credit ..........................................       --           4,012
  Exercise of common stock options ...........................................      2,368           164
                                                                                 --------      --------
        Net cash provided by financing activities ............................      2,577        12,414
                                                                                 --------      --------
Effect of exchange rate changes on cash and cash equivalents .................         48            67
                                                                                 --------      --------
Net decrease in cash and cash equivalents ....................................     (8,238)       (3,569)
                                                                                 --------      --------
Cash and cash equivalents, beginning of period ...............................     14,678         8,617
                                                                                 --------      --------
Cash and cash equivalents, end of period .....................................   $  6,440      $  5,048
                                                                                 ========      ========
</TABLE>

                   The accompanying notes are an integral part
                   of these consolidated financial statements.

                                        5
<PAGE>

<TABLE><CAPTION>
<S>                                                                              <C>          <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

  Cash paid for interest .....................................................   $   --        $    238
                                                                                 ========      ========
  Cash paid for income taxes .................................................   $    127      $     12
                                                                                 ========      ========


Supplemental disclosure of non cash financing and investing activities:

Effect of beneficial conversion feature on Series A
Redeemable Convertible Preferred Stock .......................................   $   --        $  2,094
                                                                                 ========      ========
Issuance of warrants to Silicon Valley Bank ..................................   $   --        $    132
                                                                                 ========      ========
Issuance of warrants to Insight Capital Partners .............................   $   --        $  1,402
                                                                                 ========      ========
Accretion of dividends and discount on Series A
Redeemable Convertible Preferred Stock .......................................   $   --        $    434
                                                                                 ========      ========
Accretion of discount, offering costs, and beneficial conversion
feature on issuance of Series A Redeemable Preferred Stock ...................   $   --        $    458
                                                                                 ========      ========
Conversion of notes payable to Insight Capital Partners into
Series A Redeemable Convertible Preferred Stock ..............................   $   --        $  1,500
                                                                                 ========      ========
Equipment acquired under capital lease .......................................   $   --        $    305
                                                                                 ========      ========
Issuance of common stock related to stock subscription and to settle
obligation to Microstrategy, Incorporated and related interest ...............   $   --        $ 11,666
                                                                                 ========      ========

In connection with the acquisition of Knowledge Stream Partners
on March 31, 2000, the following transaction occurred:

  Fair value of assets acquired, net of cash acquired ........................   $ 43,205      $   --
  Issuance of common stock and stock options .................................   $(39,896)     $   --
  Acquisition costs ..........................................................   $   (430)     $   --
  Cash acquired ..............................................................   $     49      $   --
                                                                                 --------      --------
  Liabilities assumed related to acquisition .................................   $  2,928      $   --
                                                                                 ========      ========

In connection with the acquisition of Customer Analytics, Inc.
on June 30, 2000, the following transaction occurred:

  Fair value of assets acquired, net of cash acquired ........................   $139,295      $   --
  Issuance of common stock and stock options .................................  $(110,942)     $   --
  Acquisition costs ..........................................................   $ (2,819)     $   --
  Cash acquired ..............................................................   $     23      $   --
                                                                                 --------      --------
  Liabilities assumed related to acquisition .................................   $ 25,557      $   --
                                                                                 ========      ========
</TABLE>
                   The accompanying notes are an integral part
                   of these consolidated financial statements.

                                        6
<PAGE>
                  EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)  BACKGROUND AND BASIS OF PRESENTATION

     Exchange Applications, Inc. and its subsidiaries (the "Company"), doing
business as Xchange Inc., provides Customer Relationship Management ("CRM")
solutions that help companies earn a greater share of their customers' business
through relevant, personalized customer communications. Xchange provides an
open-platform CRM software and services solution that enables clients to
customize offers based on profile information, synchronize offers across all
customer channels in real-time and track the responses. This solution provides
companies with the opportunity to improve their acquisition and retention of
customers and increase customer relationship profitability.

     The Company is subject to a number of risks common to rapidly growing
technology-based companies, including limited operating history, dependence on
key individuals, rapid technological changes, competition from substitute
products and larger companies, high customer concentration, the need for
adequate financing to fund future operations and the need for successful
development and marketing of its commercial products and services.


(2)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(A)  PRINCIPLES OF CONSOLIDATION

     The accompanying consolidated financial statements are unaudited, except
for the December 31, 2000 consolidated balance sheet, and have been prepared in
accordance with generally accepted accounting principles. These statements
include the accounts of Exchange Applications, Inc. and its wholly owned
subsidiaries.

(B)  INTERIM FINANCIAL REPORTING

     Certain information and footnote disclosures normally included in the
Company's annual consolidated financial statements have been condensed or
omitted. The interim consolidated financial statements, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the operating results for the
interim periods ended June 30, 2000 and 2001, respectively. The results of
operations for the interim periods are not necessarily indicative of the results
of operations to be expected for the entire year. It is suggested that these
interim consolidated financial statements be read in conjunction with the
audited consolidated financial statements for the year ended December 31, 2000,
which are contained in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on April 17, 2001.

(C)  NET INCOME (LOSS) PER SHARE

     In accordance with Statement of Financial Accounting Standards ("SFAS") No.
128, EARNINGS PER SHARE, basic and diluted net loss per common share for the
three and six months ended June 30, 2000 and 2001 is calculated by dividing the
net loss applicable to common stockholders by the weighted average number of
vested common shares outstanding.

                                        7
<PAGE>
                  EXCHANGE APPLICATIONS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     Diluted weighted average shares outstanding for the three months ended June
30, 2000 and 2001 exclude the potential common shares from stock options,
warrants, and Series A Redeemable Convertible Preferred Stock because to include
such shares would have been antidilutive. As of June 30, 2000 and 2001, the
Company had 8,669,139 and 15,570,969 potential common shares outstanding,
respectively.

(D)  COMPREHENSIVE INCOME (LOSS)

     The Company has adopted Statement of Financial Accounting Standards No.
130, REPORTING COMPREHENSIVE INCOME ("SFAS No. 130"). SFAS No. 130 requires that
items defined as other comprehensive income (loss), such as foreign currency
translation adjustments, be separately classified in the financial statements
and that the accumulated balance of other comprehensive income (loss) be
reported separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet. The components of comprehensive income
(loss) for the three and six months ended June 30, 2000 and 2001 are as follows
(in thousands):

<TABLE><CAPTION>
                                              THREE MONTHS ENDED          SIX MONTHS ENDED
                                                   JUNE 30,                    JUNE 30,
                                            ----------------------      ----------------------
                                              2000          2001          2000          2001
                                            --------      --------      --------      --------
<S>                                         <C>           <C>           <C>           <C>
Comprehensive income (loss):
   Net income (loss)                        $ (6,658)     $(52,693)     $(10,053)     $(72,956)
   Other comprehensive income (loss):
       Currency translation adjustment            84            72            48            66
       Marketable securities adjustment           (3)         --              42          --
                                            --------      --------      --------      --------
   Comprehensive income (loss)              $ (6,577)     $(52,621)     $ (9,963)     $(72,890)
                                            ========      ========      ========      ========
</TABLE>

(E)  CASH EQUIVALENTS AND MARKETABLE SECURITIES

     The Company accounts for cash equivalents and marketable securities in
accordance with SFAS No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES. Cash equivalents are short-term, highly liquid investments
with original maturity dates of three months or less. Cash equivalents are
carried at amortized cost, which approximates fair market value. The Company's
marketable securities are classified as available-for-sale and are recorded at
fair value with any unrealized gain or loss recorded as an element of
stockholders' equity. As of December 31, 1999 and June 30, 2000, the Company's
marketable securities consisted of investment grade corporate bonds. As of
December 31, 2000 and June 30, 2001, the Company had no investments in
marketable securities.

(3)  ACQUISITION OF CUSTOMER ANALYTICS, INC.

     In June 2000, the Company acquired Customer Analytics, Inc. ("CA"), a
company that specializes in the development and licensing of marketing campaign
management solutions targeted at the local branch level. The Company exchanged
4,461,684 shares of its common stock for all the outstanding shares of common
stock of CA. In addition, the Company assumed all of the outstanding employee
stock options of CA, which converted into options to acquire 714,785 shares of
the Company's common stock. As of the date of the consummation of the
acquisition, the common stock issued by the Company and the issued stock options
had a market value of $110,942,000 based on a per share value of $22.20. The
aggregate purchase price of $139,318,000 consisted of the following:

                                        8
<PAGE>
                  DESCRIPTION                        AMOUNT
                  -----------                       --------
                  Liabilities assumed               $ 25,557
                  Acquisition costs                    2,819
                  Common stock and stock options     110,942
                                                    --------
                  Total purchase price              $139,318
                                                    ========

     Included in acquisition cost was severance totaling $2,326,000 related to
56 employees of CA who were terminated in connection with the acquisition. As of
June 30, 2001, the Company has paid $1,909,000 of the severance owed to
employees. The remaining severance payment will be paid to employees in
installments through June 2002. The purchase price was allocated based upon the
fair value of the identified assets acquired. These allocations represent the
fair values determined by an independent appraisal. The allocation has resulted
in acquired goodwill of $96,449,000, which is being amortized on a straight-line
basis over a five-year period. The Company has also allocated $3,700,000 to the
assembled work force, $8,000,000 to the customer base and $17,750,000 to
purchased technology and technological know-how acquired from CA as determined
by the independent appraisal, which are being amortized on a straight-line basis
over a three-year period. The purchase price has been allocated to the acquired
assets as follows:

                  DESCRIPTION                        AMOUNT
                  -----------                       --------
                  Current assets                    $ 11,919
                  Property and equipment               1,500
                  Assembled workforce                  3,700
                  Acquired technology                 17,750
                  Customer base                        8,000
                  Goodwill                            96,449
                                                    --------
                  Total purchase price              $139,318
                                                    ========

     At December 31, 2000, the Company performed an impairment assessment of the
goodwill and intangible assets recorded in connection with the CA acquisition.
The Company determined that an impairment in the carrying value of the assets
related to the CA acquisition had occurred and reduced the carrying value of
assets related to CA to the fair value based on discounted future cash flows. As
a result, the Company recorded an impairment of goodwill of $76,604,000 in the
year ended December 31, 2000.

     At June 30, 2001, the Company performed an impairment assessment of the
goodwill and intangible assets recorded in connection with the acquisition of
CA. As a result of lower than expected revenues in the second quarter of 2001,
the strategic partnership with Carreker Corporation, and general economic trends
in the information technology sector, the Company significantly revised the
operating plan of the acquired business. The Company determined that an
impairment in the carrying value of the assets related to the CA acquisition had
occurred and reduced the carrying value of assets related to CA to fair value
based on discounted future cash flows. As a result, the Company recorded an
impairment charge of $19,349,000, in the three months ended June 30, 2001, to
reduce goodwill and other intangible assets to their estimated fair values.

(4)  RESTRUCTURING CHARGES

     In April 2001, the Company instituted a plan of corporate restructuring
under which it eliminated 72 positions across its operations, representing
approximately 15% of the total employee base. The Company recorded restructuring
charges of $7,460,000 during the three months ended June 30, 2001. This charge
was comprised of $1,120,000 of severance to displaced employees and $6,340,000
of asset impairments associated with certain long lived assets that are no
longer expected to be realized in future product releases and service offerings
due to the reprioritization of the Company's development efforts. As of June 30,
2001, the Company had paid $798,000 of the severance obligation. The remaining
severance owed to displaced employees will be paid in installments through
December 31, 2001.

                                        9
<PAGE>
(5)  TRANSACTIONS WITH INSIGHT CAPITAL PARTNERS

(A)  SECURITIES PURCHASE AGREEMENTS

     Pursuant to a Securities Purchase Agreement dated February 20, 2001, the
Company issued a 9% Bridge Promissory Note (the "February Note") and a warrant
to purchase up to 108,877 shares of the Company's common stock (the "February
Warrant") to four funds affiliated with Insight Venture Associates IV, L.L.C
(collectively "Insight") for an aggregate purchase price of $3.0 million. The
February Warrant is exercisable at any time after April 30, 2001 and on or prior
to February 15, 2011 at an exercise price of $2.7554 per share. Approximately
$112,600 of the proceeds of the February Note have been allocated to the value
of the February Warrant which has been recorded in additional paid in capital.
The resulting discount was amortized to interest expense over the period from
issuance to maturity on April 30, 2001.

     Pursuant to a Securities Purchase Agreement dated March 28, 2001, the
Company issued a 10% Bridge Promissory Note (the "March Note") and a warrant to
purchase up to 294,118 shares of the Company's common stock (the "March
Warrant") to Insight for an aggregate purchase price of $1.5 million. The March
Warrant is exercisable at any time after June 2001 prior to March 28, 2011 at an
exercise price of $1.53 per share. Approximately $144,600 of the proceeds of the
February Note have been allocated to the value of the February Warrant which has
been recorded in Additional Paid in Capital. The resulting discount was
amortized to interest expense over the period from issuance to maturity on June
28, 2001.

     Pursuant to a Securities Purchase Agreement dated June 1, 2001, the Company
issued a 12% Bridge Promissory Note (the "June Note") for an aggregate purchase
price of $7,000,000 to Insight. The June Note refinanced the February Note and
March Note as contemplated in the Undertaking Letter dated April 16, 2001
discussed below and provided and additional $2.5 million of financing. The June
Note matures on January 15, 2002. In connection with the Securities Purchase
Agreement, the Company issued a warrant (the "June Warrant") to purchase
1,363,672 shares of the Company's common stock at a per share exercise equal to
the lowest market price for the period commencing on February 20, 2001 and
ending on the earliest of (i) the exercise date of the warrant, (ii) the date
all principal and interest on the June Note is repaid and (iii) the date on
which all of the Company's obligations under the June Note are terminated due to
a conversion of the June Note to its terms. The June Warrant replaced the
February Warrant and the March Warrant. Approximately $ 1,145,000 of the face
value of the June Note has been allocated to the value of the June Warrant and
had been recorded in additional paid in capital. The resulting discount is being
amortized to interest expense over the period from issuance to the maturity date
of the June Note.

(B)  UNDERTAKING LETTER

     On April 16, 2001, the Company received an undertaking letter (the
"Undertaking Letter") from Insight. Under the terms of the Undertaking Letter,
Insight agreed to refinance the February Note and March Note with an new loan
that matures on January 15, 2002 and to provide up to $13,500,000 of additional
financing through December 31, 2001 or the consummation of the "Sale of the
Corporation", as defined in the Company's Series A Preferred Stock documents. In
accordance with the terms of the Undertaking Letter, the additional financing
will be available at any time provided that the Company has used its best
efforts to obtain financing from other investor and has not been successful in
obtaining such financing. In addition, in order to obtain funding under the
Undertaking Letter in excess of $6,500,000, the Company must achieve a minimum
of 70% of the Company's revenue projections released to the public after its
April 27, 2001 earnings conference call. The revenue numbers released by the
Company were $14,000,000 to $16,000,000 for the second quarter of 2001 and
10%-15% quarter over quarter revenue growth for the third and fourth quarters of
2001.

     In connection with the Undertaking Letter, the Company issued a warrant
(the "April Warrant") to purchase a minimum of 818,182 up to 1,519,091 shares of
the Company's common stock to Insight at a per share exercise price equal to the
lowest closing price per share of the Company's common stock from April 16, 2001
until the earlier of (a) the date of first exercise and (b) the earliest of (i)
December 31, 2001, (ii) the date that Insight's obligations, if any, with
respect to the Undertaking Letter, terminate due to notification from the
Company to that effect and (iii) the date of the consummation of a "Sale of the
Corporation" as defined in the Company's Series A Preferred Stock documents.
Under the terms of the April Warrant, additional vesting of warrants in excess
of the 818,182 minimum is accreted daily based on the number of days lapsed from
the date of the April Warrant. The Company has recorded deferred financing
charges

                                       10
<PAGE>

of $1,320,000 representing the value of the original issuance of 818,182
warrants. This charge is being amortized to interest expense over the term of
the agreement. Additional financing charges related to the vesting of warrants
in excess of the minimum share value are valued at their fair market value on
the date the warrants become vested and are recorded to interest expense during
the period in which the warrants become vested. During the three months ended
June 30, 2001, the Company recorded $670,000 in interest expense related to the
warrants issued in connection with the Undertaking Letter.

(5)  BANK LINE OF CREDIT

     In April 2001, the Company entered into a $5.0 million secured credit
facility with a bank. Availability under the credit facility is based on a
percentage of the Company's eligible receivables as defined. Borrowings under
the credit facility bear interest at the banks prime rate plus 2.5% (9.25% at
June 30, 2001). Under the terms of the agreement, the Company must maintain at
least $2.0 million of excess availability or cash and investments at all times.
In connection with the line of credit, the Company issued 70,094 warrants to
purchase the Company's common stock with a per share exercise price of $2.14.
The warrants expire in April 24, 2008. The Company has valued the warrant at
$132,000 which is being amortized to interest expense over the term of the
agreement. At June 30, 2001, the Company was out of compliance with certain
financial covenants of the line of credit. In July 2001, certain terms of the
credit facility were modified pursuant to which the bank agreed to waive the
Company's non compliance with certain financial covenants provided that the
Company receive $5 million of additional funding from the sale of equity
securities or subordinated debt on or before July 31, 2001 and additional $2.5
million of funding from the sale of equity securities or subordinated debt on or
before September 30, 2001. In July 2001, the Company received $5,000,000 in the
form of subordinated debt from the sale of convertible debentures to Insight
(see Note 7). In connection with the loan modification, the Company issued an
additional warrant to the bank to purchase 50,000 shares of the Company's common
stock with a per share exercise price of $2.14. The warrants expire on April 24,
2008.

(6)  REDEEMABLE CONVERTIBLE PREFERRED STOCK

     In January 2001, the Company designated 5,330,000 shares of its authorized
Preferred Stock, $.001 par value, as Series A Convertible Redeemable Preferred
Stock ("Series A Preferred Stock"). The Company issued 5,325,645 shares at a
purchase price of $1.2628 per share resulting in gross proceeds of $6,725,245
including a $1,500,000 note payable to Insight. Each share of Series A Preferred
Stock accrues cumulative dividends at a rate of 10% per annum. The holders of
the Series A Preferred Stock may require the Company to redeem outstanding
shares at any time after January 10, 2004 for an amount equal to a 3% premium
over the purchase price per share and all accrued and unpaid dividends. Each
share of Series A Preferred Stock is convertible into the number of shares of
the Company's common stock equal to the initial purchase price plus all accrued
and unpaid dividends divided by the Conversion Price ($1.18353 at June 30,
2001). The conversion price is subject to adjustment for certain dilutive
events, as defined. The holders of the Series A Preferred Stock are entitled to
vote on all matters together with the common stock holders as one class. The
holders of the Series A Preferred Stock are entitled to the number of votes
equal to the number of shares of common stock into which the Series A Preferred
Stock are then convertible.

     In connection with the issuance of the Series A Preferred Stock, the
Company has recorded a $2.1 million beneficial conversion feature of the Series
A Preferred Stock as a reduction to the carrying value of the Series A Preferred
Stock and as a contribution of capital to additional paid in capital. The
resulting discount on the Series A Preferred Stock will be accreted over the
period from issuance to the first redemption date of the Series A Preferred
Stock. During the three months ended June 30, 2001, the Company recorded
accretion of dividends of $233,000. In addition, the Company recorded $244,000
of the accretion of the discount on the Series A Preferred Stock.

                                       11
<PAGE>
(7)  SUBSEQUENT EVENTS

(A)  ISSUANCE OF CONVERTIBLE DEBENTURES

     Pursuant to a Securities Purchase Agreement dated July 26, 2001, the
Company issued convertible debentures in the amount of $12,241,308 to four funds
affiliated with Insight Capital Partners (Insight). These debentures replaced
the June Note including all accrued and unpaid interest and provided an
additional $5,000,000 in funding. The notes bear interest at 12% and mature on
January 10, 2005. The holders of the debentures have the option to require
prepayment of the outstanding obligations in an amount equal the aggregate
principal amount plus all unaccrued and unpaid interest multiplied by a factor
of 103% at the occurrence of (i) an event of default , as defined in the
agreement, (ii) a Liquidity event, as defined, or (iii) January 10, 2004. The
debentures are convertible at the option of the holder into the number of shares
equal the product of the unpaid principal plus any accured and unpaid interest
multiples by a factor of 103% divided by the conversion price currently $0.43447
per share (subject to adjustment as defined in the agreement).

(B)  CORPORATE RESTRUCTURING

     In July 2001, the Company initiated an additional plan of corporate
restructuring to better align the Company's cost structure with the current
economic climate. In connection with the restructuring, the Company eliminated
112 positions across its operations be reducing headcount 17% in Support &
Services, 27% in Sales, 30% in General Administration, 36% in Product Operations
and 44% in Solutions and Marketing. The company will incur restructuring costs
of approximately $1.3 million in the third quarter of 2001 associated with
severance to terminated employees and abandoned facility costs as the Company
consolidates its operations in North America. Although we will realize
significant cost savings as a result of these measures, we will need to raise
additional capital to fund operations. There is no guarantee that will be able
to raise additional funds on terms that are favorable or at all. If we are not
successful in obtaining additional financing, the Company will be at risk of
running out of money as early as December 31, 2001.


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS.

     THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. EXCHANGE APPLICATIONS' ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS" AND
ELSEWHERE IN THIS FORM 10-Q.


OVERVIEW

     Exchange Applications, Inc. and its subsidiaries (the "Company"), doing
business as Xchange Inc., provides Customer Relationship Management (CRM)
solutions that help companies earn a greater share of their customers' business
through relevant, personalized customer communications. The Company provides an
open-platform CRM software and services solution that is designed to help
clients customize offers based on profile information, synchronize offers across
multiple customer channels in real-time and track the responses. This solution
is designed to provide companies with opportunities to improve their acquisition
and retention of customers and to increase customer relationship profitability.
The Company's CRM solutions are licensed for use at approximately 290 client
sites in 33 countries, as well as the six leading U.S. marketing service
bureaus.
                                       12
<PAGE>

     CORPORATE OVERVIEW

     The Company was incorporated in November 1996. Prior to incorporation, the
Company operated as a separate division of two entities, Grant & Partners, Inc.
and Grant & Partners Limited Partnership. The Company's activities during its
early stages of operation focused on the development of software solutions to
provide customer communications support to businesses. In 1995, the Company
began providing professional services in the areas of marketing program design
and execution and data warehousing. In March 1997, the Company ceased providing
marketing program design services. The Company's development efforts culminated
in the introduction to the market in July 1996 of the first module of the
Xchange Dialogue product family, the Company's marketing automation software
product. Since this initial introduction of Xchange Campaign, the Company has
continued to focus significant resources on the development of additional
functionality and features of the Xchange Dialogue suite as well as the
development and acquisition of additional solutions within the Company's CRM
solution set including Xchange Real Time, Xchange EnAct, and the email marketing
and analytic modules of the Xchange Dialogue suite. The Company also has
continued to expand its marketing activities, build the Xchange identity,
develop the competencies of the professional services group, build international
sales and distribution channels and develop its general and administrative
infrastructure. The Company has shifted its primary business focus from
providing services to selling software products. However, the Company believes
that continuing to provide superior professional services will be critical to
maximizing its opportunities for future revenues.

     In August 1999, the Company acquired eXstatic Software, Inc. (formerly
known as Gino Borland, Inc.) ("eXstatic") in a transaction accounted for as a
pooling of interest. eXstatic develops and markets software products that enable
businesses to plan, create and execute highly personalized, permission-based
email communications based on customer profiles. In March 2000, the Company
acquired Knowledge Stream Partners, Inc. ("KSP") in a transaction accounted for
under the purchase method. KSP specializes in consulting and software
development for advanced data mining and online/offline analytics. Most
recently, in June 2000, the Company acquired Customer Analytics, Inc. ("CA") in
a transaction accounted for under the purchase method. CA develops and markets
campaign management solutions focused on creating, executing, analyzing and
measuring customer communications at the local or branch level.

     The Company generates revenue from software licenses, professional service
arrangements and software maintenance agreements. The Company recognizes revenue
based on the provisions of Statement of Position, (SOP), No. 97-2, SOFTWARE
REVENUE RECOGNITION, as amended by SOP No. 98-4 and SOP No. 98-9, and the
provisions of SOP No. 81-1, ACCOUNTING FOR PERFORMANCE OF CONSTRUCTION-TYPE AND
CERTAIN PRODUCTION-TYPE CONTRACTS.

     Software license fee revenues are generated from licensing the rights to
the use of the Company's packaged software products. Services and maintenance
revenues are generated from sales of maintenance, consulting, training and
hosting services performed for customers that license the Company's products.
The Company has concluded that effective with the new generation of Xchange
Dialogue products released in the third quarter of 2000, certain of the
implementation services related to the Dialogue product suite are essential to
the customer's use of the packaged software products. Similarly, the
implementation services for the Company's Xchange Real Time and Xchange EnAct
products are essential to the customer's use of those packaged software
products. For sales of these products where the Company is responsible for
services that are critical to the functionality of the software, the Company
recognizes revenue for these arrangements following the percentage-of-completion
method over the implementation period. Percentage of completion is measured by
the percentage of implementation hours incurred to date compared to estimated
total implementation hours. This method is used because management has
determined that past experience has shown expended hours to be the best measure
of progress on these engagements. In situations where the Company is not
responsible for such services deemed to be essential to the customer's use of
the software, the Company recognizes revenue on delivery of the packaged
software if there is persuasive evidence of an arrangement, collection is
probable, the fee is fixed or determinable and vendor-specific objective
evidence exists to allocate the total fees to all undelivered elements of the
arrangement.

     Vendor-specific objective evidence is based on the price charged when an
element is sold separately or, in the case of an element not yet sold
separately, the price established by authorized management, if it is probable
that the price, once established, will not change before market introduction.
Elements included in multiple-element arrangements could consist of software
products, maintenance, consulting and training services.

                                       13
<PAGE>

     Revenue from maintenance services is recognized ratably over the term of
the contract, typically one year. Professional services revenue is primarily
related to implementation and consulting services performed on a
time-and-materials basis under separate service arrangements. Revenues from
professional service arrangements are recognized on either a time and materials
or percentage-of-completion basis as the services are performed, provided that
amounts due from customers are fixed or determinable and deemed collectible by
management. In addition, the Company recognizes services revenue for its
application hosting service. The revenue is recognized over the service delivery
period based on either a pre-determined monthly service fee or a usage based
pricing model.

     In certain situations, the Company may enter into transactions with third
parties to acquire technology from those entities at the same time that the
Company sells its technology to those same third parties. In those instances,
the Company applies Accounting Principles Board Opinion No. 29, ACCOUNTING FOR
NONMONETARY TRANSACTIONS, and Emerging Issues Task Force Issue (EITF) No. 86-29,
NONMONETARY TRANSACTIONS: MAGNITUDE OF THE BOOT AND THE EXCEPTIONS TO THE USE OF
FAIR VALUE, to such transactions.

     In April 2001, the Company instituted a plan of corporate restructuring
under which it eliminated 72 positions across its operations, representing
approximately 15% of the total employee base. The Company recorded restructuring
charges of $7,460,000 during the three months ended June 30, 2001. This charge
was comprised of $1,100,000 of severance to displaced employees and $6,300,000
of non-cash asset impairments associated with certain long lived assets that
were expected to be realized in future product releases and service offerings.
As of June 30, 2001, the Company had paid $778,000 of the severance obligation.
The remaining severance owed to displaced employees will be paid in installments
through December 21, 2001.

     In July 2001, the Company initiated an additional plan of corporate
restructuring to better align the Company's cost structure with the current
economic climate. In connection with the restructuring , the Company eliminated
112 positions across its operations be reducing headcount 17% in Support &
Services, 27% in Sales, 30% in General Administration, 36% in Product Operations
and 44% in Solutions and Marketing. The Company will incur restructuring costs
of approximately $1.3 million in the third quarter of 2001 associated with
severance to terminated employees and abandoned facility costs as the Company
consolidates its operations in North America.

RECENT ACCOUNTING PRONOUNCEMENTS

     In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets. Statement No. 141 requires that
all business combinations initiated after June 30, 2001, be accounted for using
the purchase method of accounting. Statement No. 142 discusses how intangible
assets that are acquired should be accounted for in financial statements upon
their acquisition and also how goodwill and other intangible assets should be
accounted for after they have been initially recognized in the financial
statements. Beginning on January 1, 2002, with the adoption of Statement No.
142, goodwill and certain purchased intangibles existing on June 30, 2001, will
no longer be subject to amortization over their estimated useful life. Rather
the goodwill and certain purchased intangibles will be subject to an assessment
for impairment. The provisions of Statement No. 142 are required to be applied
starting with fiscal years beginning after December 15, 2001. The Company is
currently assessing the potential impact SFAS No. 142 will have on its
financial statements.

SIX MONTHS ENDED JUNE 30, 2000 AND 2001

     REVENUES

     The Company's total revenues decreased 23.7% from $34.8 million in the six
months ended June 30, 2000 to $26.6 million for the six months ended June 30,
2001. Software license fee revenues decreased 42.1% from $23.6 million, or 67.9%

                                       14
<PAGE>

of total revenues, in the six months ended June 30, 2000 to $13.7 million, or
51.5% of total revenues, in the six months ended June 30, 2001. The decrease in
software license fees is attributable primarily to (i) delays in completing
sales resulting from our efforts to reorganize our sales and distribution
strategy and personnel to effectively sell our new product and service suite and
(ii) a longer sales cycle and fewer sales resulting from a general market
slowdown of information technology spending. As of June 30, 2001, the Company
had 32 direct sales representatives as compared to 41 at June 30, 2000.

     Services and maintenance revenues increased 15.2% from $11.2 million, or
32.1% of total revenues for the six months ended June 30, 2000, to $12.9
million, or 48.5% of total revenues for the six months ended June 30, 2001. The
growth of services and maintenance revenues was directly attributable to
additional service engagements, including $2.0 million of incremental revenue
from ASP services, as well as additional maintenance fees from the Company's
increased base of customers . The increase in services and maintenance revenues
as a percentage of total revenues is the result of the decrease of the
contribution of software license fee revenues to the overall revenue mix during
the six months ended June 30, 2001 as compared to the six months ended June 30,
2001.

     As the Company looks to strengthen its relationships with third party
software integrators, such as Cap Gemini Ernst & Young, IBM Global Services, and
PriceWaterhouseCoopers it is expected that we will see a shift in some of the
services work historically performed by the Company to these third party
integrators. However, the Company expects to continue the expansion of its
service offerings to include newly identified opportunities as well as projects
that require unique expertise or familiarity with the Company's CRM solution
set. In addition, the Company's second generation Xchange Dialogue product set
as well as the Xchange Real Time and Xchange EnAct offerings have a high
dependency on professional services for successful deployment. While many of
these services will be performed by systems integrators, it is expected that
certain domain specific services work will continue to be delivered by the
Company.

     For the six months ended June 30, 2001, the Company's top five customers
accounted for 47.8% of total revenues as compared to 35.9% of total revenues for
the six months ended June 30, 2000. None of the top five customers during the
six months ended June 30, 2001 was a top five customer during the six months
ended June 30, 2000. The largest customer during the six months ended June 30,
2001 represented 29.7% of total revenues, while the largest customer for the six
months ended June 30, 2001 represented 15.5% of the Company's total revenues.

     Revenues from customers outside North America were $6.5 million for the six
months ended June 30, 2001, representing approximately 24% of total revenues as
compared to $8.0 million or 23% of total revenues for the comparable period in
the prior year.

     COST OF REVENUES

     The Company's cost of revenues consists of costs associated with software
license fees and costs associated with services and maintenance. Total cost of
revenues as a percentage of total revenues increased from 22.6% in the six
months ended June 30, 2000 to 36.2% in the six months ended June 30, 2001.

     Cost of software license fees consists primarily of royalty payments made
to third parties for licensed intellectual property and amortization of acquired
technology rights included in the Xchange Dialogue and Xchange Enact products,
and costs associated with software packaging and distribution. Cost of software
license fees increased from $362,000, or 1.0% of total revenues for the six
months ended June 30, 2000 to $501,000, or 1.9% of total revenues for the six
months ended June 30, 2001. Cost of software license fees as a percentage of
software license fee revenues increased to 3.7% during the six months ended June
30, 2001 from 1.5% during the six months ended June 30, 2000. The increase in
cost of software license fees for the six months ended June 30, 2001 over June
30, 2001 primarily resulted from an incremental royalty costs associated with
sales of the Xchange Analytics and Xchange Enact products during the six months
ended June 30, 2001. The Company anticipates cost of software revenues to be

                                       15
<PAGE>

between two and four percent of total revenues in the future, depending on the
number of third party leveraged components software revenue.

     The Company's cost of services and maintenance consists primarily of
personnel, facility and system costs incurred in providing professional
consulting services, training, hosted software services for the Xchange
eMessaging product, and customer support services. Cost of services and
maintenance revenues as a percentage of total revenues increased from 21.5% for
the six months ended June 30, 2000 to 34.3% for the six months ended June 30,
2001, attributable primarily to the increase in the contribution of services and
maintenance revenue to the overall revenue mix during the six months ended June
30, 2001. Cost of services and maintenance as a percentage of services and
maintenance revenues was 67.0% and 70.7% for the six months ended June 30, 2000
and 2001, respectively. The increase in cost of services and maintenance as a
percentage of services maintenance revenues is attributable primarily to the
increased use of third party sub-contractors on certain services engagements.

     Overall gross margin decreased from 77.4% for the six months ended June 30,
2000 to 63.8% for the six months ended June 30, 2001 due primarily to the
increase in the contribution of lower margin services and maintenance revenue to
the overall revenue mix.

     OPERATING EXPENSES

     SALES AND MARKETING. The Company's sales and marketing expenses consist
primarily of salaries for sales and marketing personnel, commissions, travel and
promotional expenses. For the six months ended June 30, 2000 and 2001, sales and
marketing expenses were 31.7% and 74.3% of total revenues, or $11.0 million and
$19.7 million, respectively. The increase in absolute dollars is primarily
attributable to an increase in sales and marketing personnel from 111 at June
30, 2000 to 121 at June 30, 2001 (reflective of the Company's April 2001
workforce reduction which eliminated 17 positions), as well as increased
spending on certain promotional activities including trade shows, seminars, and
the development of collateral materials designed to increase awareness of the
Company and its products. The Company anticipates selling and marketing expense
will decrease in the third and fourth quarter of 2001, both in absolute dollars
and as a percentage of total revenue, as a result of the Company's corporate
restructurings that took place in April 2001 and July 2001 which resulted in the
elimination of 55 positions from the sales and marketing functions.

     RESEARCH AND DEVELOPMENT. The Company's research and development expenses
consist primarily of employee salary and benefits, consultant costs, and
equipment and purchased software depreciation costs associated with new product
development, enhancement of existing products and quality assurance activities.
For the six months ended June 30, 2000 and 2001, research and development
expenses were 22.4% and 42.8% of total revenues, or $7.8 million and $11.4
million, respectively. This increase in absolute dollars was primarily a result
of the increase in research and development personnel from 119 at June 30, 2000
to 135 (reflective of the Company's April 2001 workforce reduction which
eliminated 19 positions), including contractors, at June 30, 2001. The Company
anticipates research and development expenses will decrease in absolute dollars
and as a percentage of total revenues as a result of the corporate
restructurings that took place in April 2001 and July 2001 which resulted in the
elimination of 65 positions, respectively, from the research and development
function.

     GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $4.2 million, or 12.0% of total revenues, for the six months ended June 30,
2000 to $9.7 million, or 36.4% of total revenues, for the six months ended June
30, 2001. The increase in absolute dollars was the result of the increase in the
number of personnel dedicated to its finance, information systems, and human
resources departments from 52 at June 30, 2000 to 63 (reflective of the
Company's April 2001 workforce reduction which eliminated 8 positions) at June
30, 2001 as well as additional investments in infrastructure and increased legal
and accounting expense associated with fundraising activities. In addition, the
Company incurred approximately $1.4 million of one-time charges associated with
an increase in the Company's bad debt and other reserves. The Company expects
general and administrative expenses will decrease both in absolute dollars and
as percentage of revenues as a result of the corporate restructurings that took
place in April 2001 and July 2001 which resulted in the elimination of 30
positions from the general and administrative functions.

                                       16
<PAGE>

     AMORTIZATION EXPENSE

     Amortization expense for the six months ended June 30, 2001 was
approximately $20.1 million consisting of $10.3 million of amortization of
goodwill and other intangible assets acquired in the acquisitions of KSP in
March 2000, and CA in June 2000 and $9.8 million of amortization of the
MicroStrategy investment acquired in December 1999. Amortization expense for the
six months ended June 30, 2000, was approximately $13.5 million consisting of $
10.0 amortization of the MicroStrategy investment acquired in December 1999 and
$3.5 million of amortization of goodwill and other intangible assets acquired in
the acquisitions of KSP in March 2000 and CA in June 2000.

     RESTRUCTURING CHARGE

     During the six months ended June 30, 2001, the Company recorded an a
restructuring charge of $7.5 million related to a corporate restructuring
consummated in April 2001. The charge is comprised of $1.1 million of severance
and $6.4 million in non-cash asset impairments associated with long lived assets
that are no longer expected to be realized in future product releases and
services offerings due to the reprioritization of the Company's development
efforts.

     IMPAIRMENT OF GOODWILL

     During the six months ended June 30, 2001, the Company recorded an
impairment charge of $19.3 million related to the goodwill recorded in
connection with the acquisition of CA. See Note 3 in the Company's unaudited
Consolidated Financial Statements as of June 30, 2001 contained elsewhere in
this Form 10-Q.

     INTEREST INCOME (EXPENSE), NET

     Interest income decreased from $848,000 for the six months ended June 30,
2000 to $116,000 for the six months ended June 30, 2001 primarily as a result of
the decrease in the Company's cash and investment balance on hand during the
comparable periods. Interest expense increased from $1.3 million for the six
months ended June 30, 2000 to $2.3 million for the six months ended June 30,
2001. Interest expense for the six months ended June 30, 2000 was comprised
entirely of non cash interest on the Microstrategy obligation. Interest expense
during the six months ended June 30, 2001 was comprised of $567,000 of non cash
interest related to the Microstrategy obligation, $1.2 million of non cash
interest expense related to the accretion of discounts on the convertible debt
and warrants issued to Insight, $54,000 of non cash interest related to the
accretion of discounts on notes payable to former shareholders of customer
anayltics, $74,000 in interest expense related to the notes payable to former
shareholders of CA, $170,000 if interest expense related to the notes payable to
Insight, $73,000 of interest expense related to the Company's bank line of
credit and $215,000 of interest expense related to capital leases.

     PROVISION FOR INCOME TAXES.

     For the six months ended June 30, 2000 and June 30, 2001, the Company
recorded an income tax provision of $21,000 and $12,000, respectively, related
primarily to minimum state income tax requirements. No significant provision for
foreign or federal, or state income taxes was recorded for the six months ended
June 30, 2000 and 2001 because the Company incurred a net loss during the six
month period.

THREE MONTHS ENDED JUNE 30, 2000 AND 2001

     REVENUES

     The Company's total revenues decreased 45.0% from $19.6 million for the
three months ended June 30, 2000 to $10.8 million for the three months ended
June 30, 2001. Software license fee revenues decreased 65.3% from $13.4 million,

                                       17
<PAGE>

or 68.0% of total revenues, in the three months ended June 30, 2000 to $4.6
million, or 42.8% of total revenues, in the three months ended June 30, 2001.
The decrease in software license fees is attributable primarily to (i) delays in
completing sales resulting from our efforts to reorganize our sales and
distribution strategy and personnel to effectively sell our new product and
service suite and (ii) a longer sales cycle and (iii) fewer sales resulting from
a general market slowdown of information technology spending. As of June 30,
2001, the Company had 32 direct sales representatives as compared to 41 at June
30, 2000.

     Services and maintenance revenues decreased 1.7% from $6.3 million or 32.0%
of total revenues, in the three months ended June 30, 2000 to $6.2 million, or
57.2% of total revenues, in the three months ended June 30, 2001. The decrease
in services and maintenance revenues in absolute dollars is the result of the
decrease in software license revenues and the services work typically associated
with those sales as well as the increased use of partners to perform certain
consulting services partially offset by increased ASP services revenue as
compared to the same period in the prior year.

     For the three months ended June 30, 2001, the Company's top five customers
accounted for 54.0% of total revenues as compared to 39.2% of total revenues for
the six months ended June 30, 2000 . None of the top five customers during the
six months ended June 30, 2001 was a top five customer during the six months
ended June 30, 2000. The largest customer during the six months ended June 30,
2001 represented 36.3% of total revenues, while the largest customer for the six
months ended June 30, 2000 represented 9.9% of the Company's total revenues.

     Revenues from customers outside North America were $3.4 million for the
three months ended June 30, 2001, representing approximately 32% of total
revenues as compared to $4.6 million or approximately 23% of total revenues for
the comparable period in the prior year.

     COST OF REVENUES

     The Company's cost of revenues consists of costs associated with software
license fees and costs associated with services and maintenance. Total cost of
revenues as a percentage of total revenues increased from 22.2% in the three
months ended June 30, 2000 to 45.3% in the three months ended June 30, 2001.

     Cost of software license fees consists primarily of royalty payments made
to third parties for licensed intellectual property and amortization of acquired
technology rights included in the Xchange Dialogue and Xchange Enact products,
and costs associated with software packaging and distribution. Cost of software
license fees increased from $221,000, or 1.1% of total revenues, for the three
months ended June 30, 2000 to $298,000, or 2.8% of total revenues for the three
months ended on June 30, 2001. Cost of software license fees as a percentage of
software license fee revenues increased from 1.7% to 6.4% for the three months
ended June 30, 2000 and 2001, respectively. The increase in cost of software
license fees for the three months ended June 30, 2001 over June 30, 2000
resulted from incremental royalty costs associated with sales of the Xchange
Analytics and Xchange Enact products during the three months ended June 30,
2001.

     The Company's cost of services and maintenance consists primarily of
personnel, facility and system costs incurred in providing professional
consulting services, training, hosted software services for the Xchange Dialogue
product suite, and customer support services. As a result of the increase in the
contribution of services and maintenance revenues to the overall revenue mix,
cost of services and maintenance revenues as a percentage of total revenues
increased from 21.1% for the three months ended June 30, 2000 to 42.6% for the
three months ended June 30, 2001. Cost of services and maintenance as a
percentage of services and maintenance revenues was 66.0% and 74.5% for the
three months ended June 30, 2000 and 1999, respectively. The increase was
attributable primarily to the increased investments by the Company in the
services infrastructure, including hardware and personnel requirements
associated with the hosted Xchange Dialogue services offering.

     Overall gross margin decreased from 77.8% for the three months ended June
30, 2000 to 54.7% for the three months ended June 30, 2001 due primarily to the
increase in the contribution of services and maintenance revenue to the overall
revenue mix.
                                       18
<PAGE>

     OPERATING EXPENSES

     SALES AND MARKETING. The Company's sales and marketing expenses consist
primarily of salaries for sales and marketing personnel, commissions, travel and
promotional expenses. For the three months ended June 30, 2000 and 2001, sales
and marketing expenses were 31.5% and 87.4% of total revenues, or $6.2 million
and $9.4 million, respectively. The increase in absolute dollars is primarily
attributable to an increase in sales and marketing personnel from 111 at June
30, 2000 to 121 at June 30, 2001 (reflective of the Company's April 2001
workforce reduction which eliminated 17 positions), as well as increased
spending on certain promotional activities including trade shows, seminars, and
the development of collateral materials designed to increase awareness of the
Company and it products. The Company anticipates selling and marketing expense
will decrease in third and fourth quarter of 2001 both in absolute dollars and
as a percentage of total revenue as a result of the Company's corporate
restructurings that took place in April 2001 and July 2001 which resulted in the
elimination of 55 positions from the sales and marketing functions.

     RESEARCH AND DEVELOPMENT. The Company's research and development expenses
consist primarily of employee salary and benefits, consultant costs, and
equipment and purchased software depreciation costs associated with new product
development, enhancement of existing products and quality assurance activities.
For the three months ended June 30, 2000 and 2001, research and development
expenses were 23.3% and 47.7% of total revenues, or $4.6 million and $5.2
million, respectively. This increase in absolute dollars was primarily a result
of the increase in research and development personnel from 119 at June 30, 2000
to 135 (reflective of the Company's April 2001 workforce reduction which
eliminated 19 positions), including contractors, at June 30, 2001. The Company
anticipates research and development expenses will decrease in absolute dollars
and as a percentage of total revenues as a result of the corporate
restructurings that took place in April 2001 and July 2001 which resulted in the
elimination of 65 positions, respectively, from the research and development
function.

     GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $2.2 million, or 11.4% of total revenues, for the three months ended June
30, 2000 to $5.4 million, or 50.1% of total revenues, for the three months ended
June 30, 2001. The increase in absolute dollars was the result of the increase
in the number of personnel dedicated to its finance, information systems, and
human resources departments from 52 at June 30, 2000 to 63 (reflective of the
Company's April 2001 workforce reduction which eliminated 8 positions) at June
30, 2001 as well as additional investments in infrastructure and increases in
legal and accounting fees associated with fundraising activities. In addition,
the Company incurred approximately $1.4 million of one time charges associated
with an increase in the Company's bad debt and other reserves. The Company
expects general and administrative expenses will decrease both in absolute
dollars and as percentage of revenues as a result of the corporate
restructurings that took place in April 2001and July 2001 which resulted in the
elimination of 30 positions from the general and administrative functions.

     AMORTIZATION EXPENSE

     Amortization expense for the three months ended June 30, 2001 was
approximately $10.1 million consisting of $5.2 million of amortization of
goodwill and other intangible assets acquired in the acquisitions of KSP in
March 2000, and CA in June 2000 and $4.9 million of amortization of the
MicroStrategy investment acquired in December 1999. Amortization expense for the
three months ended June 30, 2000 was approximately $8.6 million consisting of
$3.5 of amortization of goodwill and other intangible assets acquired in the
acquisitions of KSP in March 2000, and CA in June 2000 and $5.1 million of
amortization of the MicroStrategy investment acquired in December 1999.

     RESTRUCTURING CHARGE

     During the three months ended June 30, 2001, the Company recorded an a
restructuring charge of $7.5 million related to the Company's corporate
restructuring consummated in April 2001. The charge is comprised of $1.1 million
of severance and $6.3 million in non-cash asset impairments associated with long
lived assets that are no longer expected to be realized in future product
releases and services offerings due to the reprioritization of the Company's
development efforts.

                                       19
<PAGE>
     IMPAIRMENT OF GOODWILL

     During the three months ended June 30, 2001, the Company recorded an
impairment charge of $19.3 million related to the goodwill recorded in
connection with the acquisition of CA. See Note 3 in the Company's unaudited
Consolidated Financial Statements as of June 30, 2001 contained elsewhere in
this Form 10-Q.

     INTEREST INCOME (EXPENSE), NET

     Net interest income decreased from $373,000 for the three months ended June
30, 2000 to $62,000 for the three months ended June 30, 2001. The decrease in
interest income was the results of the decrease in the Company's cash and
investment balances during the three months ended June 30, 2001 as compared to
the three months ended June 30, 2000. Interest expense increased from $676,000
for the three months ended June 30, 2000 to $1.7 million for the three months
ended June 30, 2001. Interest expense during the three months ended June 30,
2000 related entirely to non cash interest on the Microstrategy obligation.
Interest expense during the three months ended June 30, 2001 was comprised of
$1.1 million of non cash interest related the accretion of discounts on notes
payable to Insight, $228,000 of non cash interest related to the Microstrategy
obligation, $27,000 of non cash interest related to the accretion of discounts
on notes payable to former shareholders of CA, $37,000 of interest expense
related to notes payable to former shareholders of CA, $170,000 of interest
expense related to notes payable to Insight, $86,000 of interest expense related
to our bank line of credit and $96,000 of interest expense related to capital
lease obligations.

     PROVISION FOR INCOME TAXES.

     For the three months ended June 30, 2000 and June 30, 2001, the Company
recorded income tax expense of $21,000 and $6,000, related primarily to minimum
state income tax requirements. No significant provision for foreign, federal ,
or state income taxes was recorded for the three months ended June 30, 2000 and
2001 because the Company incurred a net loss during the three month periods.

LIQUIDITY AND CAPITAL RESOURCES

     Cash and cash equivalents as of June 30, 2001 decreased $3.6 million from
December 31, 2000. Net cash used in operations of approximately $20.9 million
resulted primarily from a loss of $22.7 million before amortization expense and
other non-cash charges offset by an increase of $8.6 million in net working
capital.

     Net cash used in investing activities for the six months ended June 30,
2001, of $1.9 was primarily the result of property and equipment purchases
during the first quarter of 2001 related to the increase in headcount and
investments in infrastructure.

     Net cash provided by financing activities of $12.4 million consisted of
$4.6 million in net proceeds from the sale of Series A Redeemable Convertible
Preferred Stock, $6.9 million in net proceeds from the issuance of notes payable
to Insight, $4.0 in net borrowings under the Company's credit facility, $164,000
from exercise of the Company's common stock options and $230,000 of proceeds
from the sale of common stock under our Employee Stock Purchase Plan during the
six months ended June 30, 2001. These contributions were offset by the repayment
of $986,000 of capital lease obligations and $2.5 million from the repayment of
notes payable to former investors of CA.
                                       20
<PAGE>

     On April 16, 2001, the Company received an Undertaking Letter from Insight
under which Insight agreed to provide additional financing to support Xchange's
ongoing business operations up to $13.5 million of additional financing (the
"Additional Financing"). The Additional Financing is available at any time from
April 16, 2001 through the earlier of December 31, 2001 or the consummation of a
"Sale of the Corporation" as defined in the Company's Series A Preferred Stock
documents. Subject to the terms of the undertaking letter, the Additional
Financing will be available provided that the Company has used its best efforts
to obtain financing from other investors and has not been successful in
obtaining such financing. The terms of the Additional Financing will be
negotiated in good faith at the time the financing is provided, but in no event
will any debt securities purchased by Insight have a maturity prior to January
15, 2002. In addition, in order to obtain funding under the agreement in excess
of $6,500,000, the Company must achieve certain revenue targets as defined in
the letter (See Note 4(b) in the Company's unaudited financial statements
included in this Form 10-Q).

     In June 2001, the Company issued June Notes to Insight for an aggregate
total purchase price of $7,000,000. The June Notes refinanced the February and
March Notes as well as provided an additional $2.5 million in funding.

     In July 2001, the Company issued convertible debentures in the amount of
$12.2 million. These debentures replaced the existing June Note including all
unpaid and accrued interest and provided an additional $5.0 million in funding.

     Under Nasdaq Marketplace Rules 4350(i)(1)(B)and 4350(i)(1)(D)(ii),
shareholder approval is normally required for investments similar to the
Convertible Debentures. However, the Company requested from Nasdaq an exception
to this shareholder approval requirement pursuant to Nasdaq Marketplace Rule
4350(i)(2). Rule 4350(i)(2) provides that "excetions may be made apon
application to Nasdaq when: (A) the delay in securing shareholder approval would
seriously jeopardize the financial viability of the enterprise; and (B) reliance
by the company on this exception is expressly approved by the Audit Committee or
a comparable body of the Board of Directors." The Company obtained such
exception to the shareholder approval requirements from Nasdaq, citing the
Company's immediate need for funds.

     In addition, in April 2001, the Company received a $5.0 million secured
credit facility from Silicon Valley Bank. Availability under the credit facility
is based on a percentage of the Company's eligible receivables as defined. In
addition, the Company must maintain at least $2.0 million of excess availability
or cash and investments at all times. During the six months ended June 30, 2001,
the Company received net proceeds of $4.0 million under the line of credit. The
Company is subject to certain operational and financial covenants under the
terms of the agreement. At June 30, 2001, the Company was out of compliance with
certain financial covenants of the line of credit. In July 2001, certain terms
of the credit facility were modified pursuant to which the bank agreed to waive
the Company's non compliance with certain financial covenants provided that the
Company receive $5 million of additional funding from the sale of equity
securities or subordinated debt on or before July 31, 2001 and additional $2.5
million of funding from the sale of equity securities or subordinated debt on or
before September 30, 2001. In July 2001, the Company received $5,000,000 in the
form of subordinated debt from the sale of convertible debentures to Insight
(see Note 7).

     In July 2001, the Company instituted a plan of corporate restructuring to
better align our cost structure with our business outlook and general economic
conditions. Although we will realize significant cost savings as a result of
these measures, we will need to raise additional capital to fund operations.
There is no guarantee that the Company will be able to raise additional funds on
terms that are favorable or at all. If the Company raises additional funds
through the issuance of equity securities the ownership position of our existing
stockholders would be diluted. If we are not successful in obtaining additional
financing, the Company will be at risk of running out of money as early as
December 31, 2001.






                                       21
<PAGE>
                                  RISK FACTORS

     Statements in this report concerning the future results of operations,
financial condition and business of the Company are "forward-looking" statements
as defined in the Securities Act of 1933 and the Securities Exchange Act of
1934. Investors are cautioned that information contained in these
forward-looking statements is inherently uncertain, and that actual performance
and results may differ materially due to numerous risk factors, including but
not limited to the following:

OUR LIMITED OPERATING HISTORY MAKES EVALUATING OUR BUSINESS DIFFICULT.

     We began commercial shipment of the initial Xchange Campaign product in
July 1996. We were not a separate company until November 1996. Accordingly, we
have only a limited operating history in order to evaluate our business. The
risks, expenses and difficulties that an early-stage company like ours faces
must be considered. These risks include our ability to:

     o   successfully respond to competitive developments;

     o   continue to upgrade our products and service offerings; and

     o   continue to attract, retain and motivate qualified personnel.


RECENT EVENTS WILL RESULT IN SHORT TERM LOSSES.

     As a result of the expenses associated the transactions with MicroStrategy
Inc. and the amortization of goodwill and other intangibles from the purchase of
CA and KSP, we will report quarterly and annual operating losses for the
foreseeable future.

OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AND YOU SHOULD NOT
RELY ON THEM TO PREDICT OUR FUTURE PERFORMANCE.

     Our quarterly revenues, expenses and operating results may vary
significantly from quarter to quarter due to a number of factors. Therefore,
period-to-period comparisons of results of operations should not be relied on as
an indication of future performance. Moreover, our operating results may fall
below market analysts' expectations in some future quarters. This could cause
the trading price of our common stock to decline.

OUR BUSINESS MAY SUFFER IF OUR SOLUTIONS ARE NOT ACCEPTED BY NEW CUSTOMERS.

     We currently derive all of our revenues from our Xchange 7 product suite
and services related to our CRM solution. We anticipate that these sources will
continue to account for a majority of our revenues for the foreseeable future.
As a result, our business will suffer if the market does not accept our
solutions and our future enhancements of these solutions. If demand for our
solutions drops as a result of competition, technological change or other
factors, our business could be substantially harmed.




                                       22
<PAGE>

     The market for CRM applications is still emerging and it may not continue
to grow. Even if the market does grow, businesses may not adopt our solutions.
We have spent, and intend to continue to spend, considerable resources educating
potential customers about customer optimization software and services in general
and about the features and functions of our products and services in particular.
However, our solutions may not achieve any additional degree of market
acceptance. If the market for our solutions fails to grow or grows more slowly
than we currently anticipate, our business would be materially harmed.

WE DEPEND ON A FEW INDUSTRIES FOR MOST OF OUR SALES, AND WE MAY NOT BE
SUCCESSFUL IN EXPANDING BEYOND THOSE LIMITED MARKETS.

     A substantial portion of our revenues has been derived from sales to
telecommunications companies and financial institutions, including retail banks,
credit card issuers and mutual fund companies. We may not continue to be
successful in these markets. In addition, we may not be successful in achieving
significant market acceptance in other markets that we target.

THE LOSS OF ONE OF OUR LARGEST CUSTOMERS COULD CAUSE OUR REVENUES TO DROP
QUICKLY AND UNEXPECTEDLY.

     In fiscal 1999 and 2000 and the six months ended June 30, 2001, our top
five customers accounted for 37.7%, 26.8% and 47.8% of total revenues,
respectively. We cannot be certain that our current customers will continue to
do business with us, that business from existing customers will continue at the
levels of previous periods, or that we will be able to do a significant amount
of business with new customers. If we lose one of our customers, our revenues
could drop more quickly than we could reduce expenses. This could substantially
harm our financial results.

WE NEED TO MANAGE OUR GROWTH EFFECTIVELY OR WE MAY NOT SUCCEED.

     We have grown rapidly, with total revenues increasing from $26.2 million in
1998 to $43.3 million in 1999 and $61.6 million in 2000 and $26.6 million during
the six months ended June 30, 2001. The number of our employees and full time
equivalents has increased from 164 at December 31, 1998, to 467 at December 31,
2000 and to 384 at June 30, 2001. Our operating and financial systems and the
geographic distribution of our operations and customers have also experienced
substantial growth over this period. Our future operating results will depend on
the ability of our officers and other key employees to continue to implement and
improve our operational, customer support and financial control systems, and to
expand, train and manage our employee base. Our failure to expand and integrate
these areas in an efficient manner could cause our expenses to grow, our
revenues to decline or to grow more slowly than expected, and could have a
material adverse effect on our business.

OUR BUSINESS WILL NOT GROW IF WE DO NOT KEEP PACE WITH RAPIDLY CHANGING
TECHNOLOGIES.

     Because the market for our software products is rapidly changing, our
future success will depend upon our ability to continue to enhance our current
product line. We also must develop and introduce new products that keep pace
with technological developments, satisfy increasingly sophisticated customer
requirements and achieve market acceptance. If we are not successful in
developing and marketing, on a timely and cost-effective basis, fully functional
product enhancements or new products that respond to technological advances by
others, our business will not grow and our financial results will suffer. In
particular, our business could be harmed by:

     o  any significant errors or "bugs" in our software shipped to customers;

     o  any delay by customers in making purchasing decisions in anticipation
        of the general availability of new or enhanced products;

     o  significant delays in the general availability of our new products or
        releases;

     o  significant problems in the installation or implementation of our new
        products or releases; or

     o  customer dissatisfaction with our new products or releases.

                                       23
<PAGE>

OUR STOCK PRICE OR OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE ARE NOT ABLE
TO EFFICIENTLY INTEGRATE ACQUISITIONS.

     We have consummated and we may continue to pursue acquisitions that provide
new technologies, products or service offerings. Future acquisitions by us may
involve potentially dilutive issuance's of equity securities. We also may incur
substantial additional liabilities and expenses, such as debt or amortization
expenses related to goodwill and other intangible assets. If any of these occur,
the market price of our common stock and our financial results could suffer.

     Acquisitions also involve numerous risks, including:

     o  difficulties in the assimilation of the operations, technologies,
        products and personnel of the acquired company;

     o  the diversion of management's attention from other business concerns;

     o  risks of entering markets in which we have no or limited prior
        experience; and

     o  the potential loss of key employees of the acquired company.

     If we are not successful integrating acquisitions, it could increase our
expenses and harm our business.

COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR BUSINESS.

     Our competitors may be able to develop products and services that are more
attractive to businesses than our products and services. Many of our competitors
have longer operating histories, significantly greater financial, technical,
marketing and other resources, greater name recognition and larger customer
bases. As a result, they may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements. They also may be able to
devote greater resources to the promotion and sale of their products and
services than us. If these companies introduce products and services that
effectively competed with our products and services, they could be in a position
to charge lower prices or to bundle their products and services with their other
products and services. This could give them a competitive advantage over us.

     In order to be successful in the future, we must continue to respond
promptly and effectively to the challenges of technological change and
competitors' innovations. If we cannot compete successfully with existing or new
competitors, we may have to reduce prices on our products, which could lead to
reduced profits. We could also lose market share, which would materially and
adversely affect our business.

IF WE DO NOT SUCCESSFULLY MAINTAIN OUR RELATIONSHIPS WITH INDIRECT DISTRIBUTION
CHANNELS, OUR SALES COULD DECLINE OR COULD GROW MORE SLOWLY THAN EXPECTED.

     We expect to increase the amount of our products that we distribute through
various indirect channels. We are unable to predict the extent to which our
distribution partners will be successful in distributing our products. We rely
on the marketing and sales efforts of these organizations, many of whom also
market and sell competitive products. The loss of one or more of our
relationships with these organizations could have a material adverse effect on
our business.

     Our future performance will also depend, in part, on our ability to attract
organizations that will be able to market and support our products effectively,
especially in markets in which we have not previously distributed our products.
None of our agreements governing the re-seller or co-marketing relationships

                                       24
<PAGE>

with these organizations includes any commitments on the part of these
organizations to effect any minimum number of sales of our products, or
otherwise to provide us with business. If revenues arising from our
relationships with these organizations do not exceed historical levels, our
business will not grow as expected.

WE HAVE A LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND OTHERS
COULD INFRINGE ON OR MISAPPROPRIATE OUR PROPRIETARY RIGHTS.

     Our success and ability to compete are substantially dependent on our
internally developed technologies and trademarks, which we protect through a
combination of copyright, trademark and trade secret laws, confidentiality
procedures and contractual provisions.

     Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult and, while we are unable to determine the extent to which piracy of
our software products exists, we expect software piracy to be a problem. In
addition, the laws of some foreign countries do not protect our proprietary
rights to the same extent as the laws of the United States. Furthermore, our
competitors may independently develop technology similar to ours.

     The number of intellectual property claims may increase as the number of
competing products grows and the functionality of products in different industry
segments overlaps. Although we are not aware that any of our products infringe
upon the proprietary rights of third parties, there can be no assurance that
third parties will not claim infringement by us with respect to current or
future products. Any of these claims, with or without merit, could be time-
consuming to address, result in costly litigation, cause product shipment delays
or require us to enter into royalty or licensing agreements. These royalty or
licensing agreements, if required, might not be available on terms acceptable to
us or at all, which could have a material adverse effect upon our business.

IF WE DO NOT SUCCESSFULLY GROW AND MANAGE OUR INTERNATIONAL OPERATIONS, OUR
BUSINESS WILL SUFFER.

     We have operations in a number of foreign markets. We currently have
customers in more than 33 countries. We believe that we must expand our sales in
international markets in order for our business to grow as planned. In order to
successfully expand international sales, we must establish additional foreign
operations and hire additional personnel. If we are unable to do so in a timely
and effective manner, our growth in international sales will be limited, and our
business could be materially adversely affected. We have begun to translate our
products into different languages and character sets, which may be more
difficult or expensive to complete than expected. In addition, other markets may
have longer selling cycles and different product requirements than the United
States and we may not be able to successfully adapt our products and methods.

     Our international operations are also subject to the risks inherent in any
international business activities, including, in particular:

     o    management of an organization spread over various countries;

     o    longer accounts-receivable payment cycles in certain countries;

     o    compliance with a variety of foreign laws and regulations;

     o    unexpected changes in regulatory requirements;

     o    overlap of different tax structures; and

     o    general economic conditions.

CURRENCY FLUCTUATIONS AND GENERAL ECONOMIC CONDITIONS IN OUR FOREIGN MARKETS MAY
IMPACT OUR CUSTOMERS' SPENDING AND THE VALUE OF MONEY OWED TO US.

                                       25
<PAGE>

     We have made substantial sales to international customers in Canada,
Denmark, Germany, the Netherlands, Sweden, the United Kingdom and China. Our
revenues from international operations have been denominated in foreign
currencies which historically have been relatively stable in relation to U.S.
dollars. As a result, we have not adopted a policy of hedging foreign currency
risks. If economic conditions in our target markets decline, currencies could
fluctuate relative to the U.S. dollar, and our customers could reduce their
information technology spending.

OUR FOUNDERS, OFFICERS AND PRINCIPAL STOCKHOLDERS HAVE SUBSTANTIAL CONTROL OVER
OUR VOTING STOCK AND HAVE THE ABILITY TO MAKE DECISIONS THAT COULD ADVERSELY
AFFECT OUR STOCK PRICE.

     As of December 31, 2000, our current officers, directors and principal
stockholders held approximately 19.4% of our outstanding common stock and voting
common stock equivalents. Consequently, this group will be able to control the
outcome of all matters submitted for stockholder action, including the election
of members to our Board of Directors and the approval of significant change in
control transactions, which may have the effect of delaying or preventing a
change in control. Representatives of the existing stockholders constitute all
five directors and will therefore have significant influence in directing the
actions of the Board of Directors. We have not identified candidates for
additional positions on the Board of Directors.

WE MAY BE SUBJECT TO FUTURE PRODUCT LIABILITY CLAIMS.

     While our license agreements with our customers typically contain
provisions designed to limit our exposure to potential product liability claims,
it is possible that these provisions may not be effective under the laws of
certain jurisdictions. Although we have not experienced any product liability
claims to date, we may be subject to claims in the future. A successful product
liability claim brought against us could have a material adverse effect on our
business. Moreover, defending these claims, regardless of merit, could entail
substantial expense and require the time and attention of key management
personnel.

OUR COMMON STOCK PRICE IS LIKELY TO BE VOLATILE AND COULD DROP UNEXPECTEDLY.

     The market for securities of most high technology companies, including our
common stock, has been highly volatile. It is likely that the market price of
the common stock will continue to fluctuate widely in the future. Factors
affecting the trading price of our common stock include:

     o  responses to quarter-to-quarter variations in our results of
        operations;

     o  the announcement of new products or product enhancements by us or our
        competitors;

     o  technological innovation by us or our competitors;

     o  general market conditions or market conditions specific to particular
        industries; and

     o  changes in earnings estimates by analysts.

WE HAVE ADOPTED ANTI-TAKEOVER PROVISIONS THAT COULD AFFECT THE MARKET PRICE OF
OUR COMMON STOCK OR OUR ABILITY TO SELL OUR BUSINESS.

     Certain provisions of our amended and restated certificate of incorporation
and our by-laws could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders. In addition, certain
provisions of Delaware law and our stock incentive plans may also have the
effect of discouraging, delaying or preventing a sale.

WE WILL REQUIRE ADDITIONAL FINANCING, WHICH MAY BE DIFFICULT TO OBTAIN AND MAY
DILUTE OUR SHAREHOLDER'S OWNERSHIP INTEREST.

                                       26
<PAGE>

     We will require additional capital to fund our operations. We may seek
additional through public or private financings. Additional funding may not be
available on terms acceptable to us or at all. If we raise additional funds by
issuing equity securities further dilution to our then existing stockholders may
result. In addition, the terms may adversely affect the rights of our
stockholders.

WE ARE, AND MAY IN THE FUTURE BE, INVOLVED IN SECURITIES CLASS ACTION
LITIGATION.

     The Company, certain of our current or former officers have been named
defendants in two securities class action lawsuits filed on behalf of a
purported class of purchasers of the our common stock during the period July 24,
2000 through September 29, 2000. These lawsuits seek monetary damages for
alleged violations of securities laws. If the plaintiffs are successful and
their recoveries exceed the limits of our insurance coverage, our financial
position will be harmed. Litigation is inherently uncertain and an adverse
resolution of the actions may have a negative effect on our operating results in
the period in which they are resolved. For further discussion of these lawsuits
see the discussion of Legal Proceedings elsewhere in this prospectus.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     The following discussion about the Company's market risk disclosures
involves forward looking statements. Actual results could differ materially from
those projected in the forward-looking statements. The Company is exposed to
market risk related to changes in interest rates and foreign currency exchange
rates. The Company does not use derivative financial instruments for speculative
or trading purposes.

     INTEREST RATE SENSITIVITY. The Company maintains a short-term investment
portfolio consisting mainly of corporate debt securities and U.S. government
agency treasury bills and notes with an average maturity of less then twelve
months. These available-for-sale securities are subject to interest rate risk
and will fall in value if market interest rates increase. If market interest
rates were to increase immediately and uniformly by 10 percent from levels at
June 30, 2001, the fair value of the portfolio would decline by an immaterial
amount.

     FOREIGN CURRENCY EXCHANGE RISK. With sales and services offices in London,
Sydney, Johannesburg, Korea and Tokyo the Company faces exposure to adverse
movements in foreign currency exchange rates. These exposures may change over
time as business practices evolve and could have a material adverse impact on
the Company's financial results. Historically, the Company's primary exposure
has been nondollar-denominated operating expenses and sales by its United
Kingdom subsidiary. The introduction of the Euro as a common currency for
members of the European Monetary Union, of which the United Kingdom is not a
member, occurred in January 1999. To date, we have not noticed any material
impact from the introduction of the Euro. In addition, as the Company expands
its sales and service presence in the Asia/Pacific region in 2001, its exposure
to foreign currency exchange rate risks from the more volatile economies of this
region will increase. The Company is prepared to hedge against fluctuations in
the British Sterling, Euro, or other foreign currency if the exposure becomes
material. As of June 30, 2001 the Company's material nondollar-denominated
assets and liabilities primarily consisted of cash, accounts receivable, and
accounts payable denominated in British Sterling and Australian dollars.

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<PAGE>

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     Xchange and certain of our current or former officers and its certified
public accountants , Arthur Andersen, LLP, have been named defendants in a
consolidated class action lawsuit originally filed on February 21, 2001 and
including a Consolidated Amended Class Action Complaint filed August 3, 2001,
filed on behalf of a purported class of purchasers of the our common stock
during the period from December 9, 1998 through September 29, 2000. The Amended
Class Action Complaint alleges that we made false or misleading statements that
inflated our common stock price during the class period. The relief sought is
damages on behalf of the class. The action is pending in the United States
District Court for the District of Massachusetts. We believe that the
allegations are without merit and we intend to defend the litigation vigorously.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     (a) The Annual Meeting of Stockholders of the Company was held on
         June 25, 2001 follows:

        (1) The Company submitted a proposal to re-elect Mr. Andrew J. Frawley
            and Mr. Ramanan Raghavendran as directors of the Company to hold
            office for a three-year term and until his successor has been duly
            elected and qualified. The results of the votes cast are as follows:

            MR. ANDREW J. FRAWLEY:
            ----------------------
                For                    Against                   Withheld
            ----------                ---------                  --------
            29,594,161                1,221,695                     --

            MR. RAMANAN RAGHAVENDRAN:
            -------------------------
                For                    Against                   Withheld
            ----------                ---------                  --------
            30,626,305                  189,551                     --


        (2) The Company submitted a proposal to ratify the action of the Board
            of Directors in amending the 1998 Employee Stock Purchase Plan to
            increase the number of shares of common stock authorized for
            issuance thereunder from 400,000 to 1,000,000. The results of the
            votes cast are as follows:

                For                    Against                   Withheld
            ----------                ---------                  --------
            29,767,835                 971,192                    76,829



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<PAGE>

ITEM 6. EXHIBITS AND REPORTS  ON FORM 8-K.

(a)  Exhibits

Exhibit 4.1*      Certificate of Designation of Series A Preferred Stock of
                  Exchange, dated as of January 10, 2001. (Incorporated by
                  reference to the Company's Form 8-K dated January 10, 2001,
                  filed with the Commission on January 24, 2001)

Exhibit 10.1*     Securities Purchase Agreement, dated as of January 10, 2001,
                  by and among Exchange and the purchasers of the Series A
                  Preferred Stock, includes all Schedules thereto. (Incorporated
                  by reference to the Company's Form 8-K dated January 10, 2001,
                  filed with the Commission on January 24, 2001)

Exhibit 10.2*     Registration Rights Agreement by and among Exchange and the
                  purchasers of the Series A Preferred Stock, dated as of
                  January 10, 2001. (Incorporated by reference to the Company's
                  Form 8-K dated January 10, 2001, filed with the Commission on
                  January 24, 2001)

Exhibit 99.1*     Form of Securities Purchase Agreement, dated as of February
                  20, 2001, by and among the Company and InSight. (Incorporated
                  by reference to the Company's Form 8-K dated February 20, 2001
                  filed with the Commission on April 12, 2001)

Exhibit 99.2*     Form of 9% Bridge Promissory Note in the aggregate principal
                  amount of up to $3,000,000 issued by the Company to InSight,
                  dated as of February 20, 2001. (Incorporated by reference to
                  the Company's Form 8-K dated February 20, 2001 filed with the
                  Commission on April 12, 2001)

Exhibit 99.3*     Form of Warrant issued by the Company to InSight, dated
                  February 20, 2001. (Incorporated by reference to the Company's
                  Form 8-K dated February 20, 2001 filed with the Commission on
                  April 12, 2001)

Exhibit 99.4*     Form of Amended and Restated Registration Rights Agreement,
                  dated as of February 20, 2001, by and among the Company and
                  InSight. (Incorporated by reference to the Company's Form 8-K
                  dated February 20, 2001 filed with the Commission on April 12,
                  2001)

Exhibit 99.5*     Form of Securities Purchase Agreement, dated as of March 28,
                  2001, by and among the Company and InSight. (Incorporated by
                  reference to the Company's Form 8-K dated February 20, 2001
                  filed with the Commission on April 12, 2001)

Exhibit 99.6*     Form of 10% Bridge Promissory Note in the aggregate principal
                  amount of up to $1,500,000 issued by the Company to InSight,
                  dated as of March 28, 2001. (Incorporated by reference to the
                  Company's Form 8-K dated February 20, 2001 filed with the
                  Commission on April 12, 2001)

                                       29
<PAGE>

Exhibit 99.7*     Form of Warrant issued by the Company to InSight, dated March
                  28, 2001. (Incorporated by reference to the Company's Form 8-K
                  dated February 20, 2001 filed with the Commission on April 12,
                  2001)

Exhibit 99.8*     Form of Second Amended and Restated Registration Right
                  Agreement, dated as of March 28, 2001, by and among the
                  Company and InSight. (Incorporated by reference to the
                  Company's Form 8-K dated February 20, 2001 filed with the
                  Commission on April 12, 2001)

Exhibit 99.9*     Form of Loan and Security Agreement with Silicon Valley Bank
                  dated as of April 25, 2001. (Incorporated by reference to the
                  Company's Form 10-Q dated May 15, 2001 filed with the
                  Commission on May 15, 2001)

Exhibit 99.10*    Form of Securities Purchase Agreement, dated as of June 1,
                  2001, by and among the Company and InSight. (Incorporated by
                  reference to the Company's Form 8-K June 1, 2001 filed with
                  the Commission on June 11, 2001)

Exhibit 99.11*    Form of 12% Bridge Promissory Note in the aggregate principal
                  amount of up to $7,000,000 issued by the Company to InSight,
                  dated as of June 1, 2001. (Incorporated by reference to the
                  Company's Form 8-K June 1, 2001 filed with the Commission on
                  June 11, 2001)

Exhibit 99.12*    Form of Warrant issued by the Company to InSight, dated June
                  1, 2001. (Incorporated by reference to the Company's Form 8-K
                  June 1, 2001 filed with the Commission on June 11, 2001)

Exhibit 99.13*    Form of Third Amended and Restated Registration Rights
                  Agreement, dated as of June 1, 2001, by and among the Company
                  and InSight. (Incorporated by reference to the Company's Form
                  8-K June 1, 2001 filed with the Commission on June 11, 2001)

Exhibit 99.14*    Form of Securities Purchase Agreement, dated as of July 26,
                  2001, by and among the Company, eXstatic and Insight.
                  (Incorporated by reference to the Company's Form 8-K July 26,
                  2001 filed with the Commission on August 10, 2001)

Exhibit 99.15*    Form of 12% Senior Subordinated Convertible Debenture issued
                  by the Company to Insight, dated July 26, 2001. (Incorporated
                  by reference to the Company's Form 8-K July 26, 2001 filed
                  with the Commission on August 10, 2001)

Exhibit 99.16*    Form of 12% Senior Subordinated Convertible Debenture, issued
                  by the Company to Insight, dated July 26, 2001. (Incorporated
                  by reference to the Company's Form 8-K July 26, 2001 filed
                  with the Commission on August 10, 2001)

                                       30
<PAGE>

Exhibit 99.17*    Form of Fourth Amended and Restated Registration Right
                  Agreement, dated as of July 26, 2001, by and among the Company
                  and Insight. (Incorporated by reference to the Company's Form
                  8-K July 26, 2001 filed with the Commission on August 10,
                  2001)

Exhibit 99.18*    Form of Security Agreement, dated as of July 26, 2001, by and
                  among the Company, eXstatic and Insight. (Incorporated by
                  reference to the Company's Form 8-K July 26, 2001 filed with
                  the Commission on August 10, 2001)

Exhibit 99.19*    Form of Undertaking Letter, dated April 16, 2001 between
                  Exchange and Insight. (Filed as Exhibit 10.19 to the Company's
                  Annual Report on Form 10-K, dated April 17, 2001)

Exhibit 99.20*    Form of Warrant, dated April 16, 2001, issued to Insight by
                  Exchange. (Filed as Exhibit 10.20 to the Company's Annual
                  Report on Form 10-K dated April 17, 2001)

Exhibit 99.21     Form of Loan Modification Agreement between Silicon Valley
                  Bank and Exchange Applications, Inc. and eXstatic
                  Software, Inc.



(b)   Reports on Form 8-K

      Our report on Form 8-K filed with the SEC on June 11, 2001.
      Our report on Form 8-K filed with the SEC on April 12, 2001.
      Our report on Form 8-K filed with the SEC on August 10, 2001.






























                                       31
<PAGE>




                                   SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused the report to be signed on its behalf by the
undersigned, thereunto duly authorized.




                                             Exchange Applications, Inc.
                                             (Registrant)

Dated: August 14, 2001

                                             By: /s/ Thomas Phair
                                                 --------------------------
                                                (authorized officer and
                                                 principal finance and
                                                 accounting officer)
































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